Preserve Assets While Providing Higher Transfer To Heirs And Charities

How many seniors do you know who have IRAs, annuities or cash assets that they are looking to leave to their heirs/charity? How many of them need a funding method to cover the cost of insurance on themselves?

For clients in the senior market, one of the most effective ways of leveraging assets is to move the monies into a single premium immediate annuity (SPIA) with a life-only option.

Then, take the payout that is provided (less the taxation on the payout, which is figured by using the exclusion ratio) and use the remaining amount to fund a higher death benefit life insurance policy with a lifetime death benefit guarantee, or a long-term care policy. If there are remaining funds, the client can take it as income, gift it to heirs or send it to a charity.

Why a life-only option on the SPIA? The structure avoids taxation to the heirs. It also avoids inclusion of the SPIA in the estate upon death of the client. When the client dies, the SPIA reverts back to the insurance company. But the clients beneficiary receives the life insurance policy proceeds in a larger face amount than the original deposit. (Note: The policys death benefit can be set up to be paid out to the heirs, to a charity or a percentage to both.)

To see the value in this, consider what happens if the client simply holds on to the original annuity, without moving it into a SPIA and also purchasing life insurance. Upon the clients death, the annuity proceeds would be subject to state and federal taxation, and in some cases the heirs would have to take a prolonged payout to get the monies paid out in full.

Here is an example: Let us say we have a 67-year-old man, rated standard non-smoker, who has $125,000 in an existing annuity. If he surrenders the annuity, he would have a penalty of $4,200. This leaves him with a total surrender amount of $120,800. His current company would give him a payout of $10,000. After federal and state taxes his net payout would be $6,500 each year.

By shopping the SPIA, however, a producer could use that same $120,800 and come up with a net payout of $7,800 each year after taxes. This $7,800 could purchase a lifetime death benefit guaranteed universal life policy with a death benefit of over $225,000.

Of course, our client can do several things with his $7,800 a year. He could use the cash as a retirement supplement, use all of the money to purchase a fully guaranteed life insurance policy or a LTC insurance policy, use part of the money to fund both life and LTC insurance, or do a combination of all three. But in any instance, you the financial advisor have provided for your client a higher standard of dollar leverage and tax savings than he previously had.

This same methodology can work in charitable giving scenarios. Most people have an organization to which they belong or which they admire and would like to see succeed. Many want to, and do, provide gifts to that organization. If your client is so inclined, point out that he or she can leverage these charitable giving dollars and provide greater revenue and flexibility to the organization by using life insurance.

For example: Assume that, right now, the client is making a monthly gift of $875 to a charity that is using the donation for immediate expenses. What if the client instead uses that same $875 a month to purchase a life policy?

This time let us assume that your client is a woman, age 67, who is rated standard non-smoker. The $875 per month could buy over $407,000 in lifetime guaranteed death benefits. The client would gift the premiums each month to the charity. The charity would pay the premiums on the policy. If the charity is made owner of the policy, the charity gets immediate or future use of loans and withdrawals from the policys cash value. Moreover, when the client dies, if the charity is the designated beneficiary, all death benefit proceeds are paid to the charity (less any loans or withdrawals).

By comparison, if this woman wanted to equal the $407,000 total gift just by making the $875 monthly payments, she would have to make the $875 gifts over the next 38.8 years. In other words, she would have to live to be 105 years old! Medical technology is great, but right now it is not likely she will live that long.

Alternatively, this woman could use a portion of the gift she is currently making–say, $321 per month–to purchase a LTC policy with lifetime coverage, $100 daily benefit, 90-day elimination, and a compounding inflation rider.

Next, to cover any death benefit her family may have and to pass money on to her heirs, she could use $277 per month to purchase over $127,000 in lifetime guaranteed death benefit life insurance.

Finally, she could take the remaining $277 to purchase another $127,000 lifetime guaranteed death benefit life insurance policy with her favorite charity as the owner and beneficiary. It would still take her over 12 years of consistent $875 per month donations to equal the $127,000 policy that she would be gifting, but this arrangement does help the client obtain valuable LTC and life insurance as well as continue the legacy of charitable giving.

Braun T. Jones is director of marketing at Brokerage Professionals/Interlink Securities Inc., Phoenix, Colo. He can be e-mailed at braun@bpim.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, October 28, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.